A new bill would allow entrepreneurs to raise up to $2 million from individual investors without having to be approved by securities regulators. But would this free up more entrepreneurial firepower to help the economy, or just cause chaos and confusion for investors and regulatory headaches?

[R]esponsibly allowing startups to raise money through “crowdfunding” – gathering many small-dollar investments that add up to as much as $1 million. Right now, entrepreneurs like these bakers and these gadget-makers are already using crowdfunding platforms to raise hundreds of thousands of dollars in pure donations – imagine the possibilities if these small-dollar donors became investors with a stake in the venture.

Under current investment rules, only “accredited” or “sophisticated” investors can invest in what are called private placements: this group includes companies or partnerships with a net worth of more than $5 million; individuals or couples with a combined net worth of $1 million, and those who are insiders of the company in question — in other words, officers or directors — as well as investors who are working through a professional investment advisor (such as an accountant or attorney). And companies that raise money in this way are forbidden from advertising that they are looking for financing.

In other words, not only are the potential sources of funding for small companies currently reduced to a tiny proportion of the economy, but the startups that are most in need of these kinds of financing are prevented from advertising — even on Twitter or through social networks — that they are interested in raising money. They can take donations through Kickstarter and other platforms, as startups like the would-be Facebook alternative Diaspora have, but they can only provide gifts or products in return, not shares in the company.

Bill would give startups more funding options

The current rules lock most startups into a particular pattern: in most cases, their initial funding comes from friends and family, and then — if the business isn’t already providing enough free-cash flow — the company has to find individual “angel” investors (who meet all of the above tests) to get a larger amount of money to fund their growth. If they don’t fail at this level, then they typically move on to raising traditional financing from venture-capital funds, and if they grow large enough they do private placements with banks and brokerage firms, the way that both Facebook and Twitter have over the past year or so.

Can a principle that allows musicians to raise money for albums be extended to the U.S. economy as a whole? The answer seems to depend on whether you are an optimist or a pessimist about the value of crowdfunding in general, and social tools like Facebook and Twitter. If such tools can help some entrepreneurs raise money they need to create their own businesses, then why not make it easier for them to do so? Provided it is properly regulated, it sounds like just the kind of thing the U.S. economy could use more of.

Sure, it might encourage a bubble mentality and cause people to gamble on unproven companies — but then the traditional stock market already does plenty of that, and we’ve gotten pretty used to having that around.